First published in the Quoted Cleantech newsletter - April 2010

by Andrew Hore

London’s Alternative Investment Market includes a number of renewable energy project developers with ventures in Europe and India. Broker Religare, which has published a large and comprehensive research note on renewable energy developers, believes that these companies offer the best potential returns from the cleantech sector on AIM.

The renewable generators segment of the Sigma AIM Cleantech index has risen by 64% over the past year. The biggest company in this part of the index, Renewable Energy Generation (REG), still has a relatively small portfolio of wind and bio-oil projects, but it has more under construction and is in the process of gaining planning permission. REG recently sold off its North American assets in order to focus on the UK.

Renewables, which are becoming increasingly competitive in terms of price, provide cost-effective ways of filling the gap in capacity that will be caused by further economic growth and the decommissioning of ageing generation capacity.

BTM Consult expects 221GW of wind capacity to be added around the world in the next five years, while Clean Edge estimates that the wind power market will be worth $140 billion by 2018. Clean Edge also predicts that the solar market will be worth $80 billion in the same year.

Bloomberg’s forecast is that the renewables sector will increase its share of the world generating market from 13% to 22% by 2020.  

Religare even believes that there has been a resurgence in the availability of project finance for renewables. The long term contracts that can be negotiated with customers make this form of project finance less risky than many others.
Combine that with a fall in the price of some of the technology, and the outlook for renewable generators is positive.

The acquisition of Novera Energy by Infinis Energy at the end of 2009 demonstrated that many AIM-quoted energy project developers had been undervalued. The 77p per share bid valued Novera at just over £111 million. That represented a 60% premium compared to the share price prior to the initial bid in October, and was in no way considered generous by analysts.  

Religare believes that the best exit route for renewable energy project developers is via takeover, with utilities being keen to increase their exposure to the renewables sector.

However, companies will need to reach a certain size before they become attractive acquisition targets. Religare estimates that a generating portfolio will need to be at least 300MW before the costs of acquisition are justified. There will also need to be additional capacity coming on stream in the future, since the development pipeline is the part of the portfolio which offers the most upside. This is partly due to the fact that AIM does not always fully value the development assets of a quoted company because of lack of information and the uncertainty involved.

One factor that could alter the size requirement for a company would be a portfolio with a wider range of technologies. However, a large number of small generating assets is unlikely to be attractive to a utility, which would prefer a more limited number of larger sites.

The geographic make-up of the portfolio is also important. It needs either to fit in with the existing business or offer an entry to a growing market such as India.

For this reason Religare’s favourite in the sector is Indian power generation developer Greenko, which recently raised £72 million to help finance the expansion of its portfolio. Greenko is targeting 1,000MW of generating capacity by 2015: so far, 122MW of hydro and biomass capacity is up and running. The company may also become involved in wind, solar, or even gas-fired generation.

Religare approves of Greenko’s management team, but is concerned that the rapid rate of expansion could be difficult to manage.

According to Religare, the existing portfolio is worth 152p a share and the development pipeline is worth a further 30p per share. Greenko’s recent fundraising was at 140p a share.

Andrew Hore is a highly-respected small company journalist who has covered London’s Alternative Investment Market for more than a decade and is the publisher of AIM Micro: www.aimmicro.com

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